McDonald’s to Increase Royalty Fees for New Franchises in US and Canada

McDonald’s, the world’s largest fast-food chain, has announced that it will raise its royalty fees for new franchisees in the US and Canada from 4% to 5%, starting from January 1, 2024. This is the first time in nearly 30 years that the company has increased its royalty fees, which are paid by franchisees to use the McDonald’s brand and system.

Why McDonald’s is raising its royalty fees?

According to the company, the decision to raise its royalty fees is aimed at maintaining its competitive edge and reflecting the value of its brand, which has been growing steadily over the years. McDonald’s said that the royalty rate is currently at 5% across its markets other than the US and Canada, and that the change will help align the North American market with the international market.

McDonald’s also said that it will stop using the term “service fee” or “service charge” and switch to the word “royalty”, which is more commonly used by franchisors. The company said that this will reduce confusion and help franchisees understand the power of what they buy into when they join the McDonald’s system.

How the change will affect franchisees?

The change will not affect all franchisees, as the rate will remain the same for those who are currently running McDonald’s locations and extend their leases, as well as those who sell their franchises to other operators. The change will also not apply to rebuilt existing locations or restaurants transferred between family members.

However, the change will affect new franchisees, buyers of company-owned restaurants, relocated restaurants, and other scenarios that involve the franchisor. McDonald’s estimated that the change will be limited to hundreds of restaurants in the US and Canada in a given year, but it will apply to more restaurants over time.

The change may also spark some backlash from franchisees, who have clashed with the company over various issues in the past, such as a new assessment system for restaurants and a California bill that will increase wages for fast-food workers by 25% next year. McDonald’s franchisees have formed their own advocacy group, the National Owners Association, to voice their concerns and demands.

McDonald’s outlook and strategy

Despite the potential challenges, McDonald’s remains optimistic about its future and its relationship with its franchisees, who operate about 95% of its roughly 13,400 US restaurants and 40,300 global restaurants. The company said that it is always looking ahead and making decisions for the long term to ensure the success of its brand and system.

McDonald’s has been investing in various initiatives to boost its growth and profitability, such as digital ordering, delivery, drive-thru, loyalty programs, menu innovation, and restaurant modernization. The company has also been recovering from the impact of the Covid-19 pandemic, reporting strong sales and earnings in the second quarter of 2023.

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